Home Equity . . . Appeal It and Repeal It!

Many private colleges are starting to give breaks to homeowners by using more generous financial aid calculations that is expected to reduce the expected contributions for families whose homes have appreciated. Unlike past aid efforts, which mainly helped financially needed students, the latest moves also stand to benefit more affluent families.

Some universities in the past have counted the market value of the home up to 2.4 times the family income. Other schools have been counting home equity and cap that at 1.2 times income. Stanford University said it would begin capping the amount of home equity assessed in the calculation of a parental contribution to 1.5 times the family income.

Harvard University announced recently that they would not count home equity in their formula. It's about time! Home equity probably never should have been counted in the first place at this Ivy League school or any other college in the country.

A family owns their home with a value of over $800,000 free and clear. The equity can be used to sell and buy another home or it can be very helpful during retirement if one decides to take a reverse mortgage. However, using home equity to pay for college is very expensive.

Home equity is not the same as having a savings account with a bank. You can't go to the bank and say I have $800,000 in equity please give me $150,000. To use equity one must borrow from the bank. A family takes out a $150,000 30 year 6% mortgage with monthly payments of $899.33 to cover the cost of college. Over the course of the loan they would pay $173,757 in interest making the total cost of $323,757 more then double the original amount.

Instead of holding the property for thirty years the family decides to sell after ten years. They would still owe $125,529 on their $150,000 loan after making $107,920 in payments. During the past decade very small equity growth like the $24,471 in this situation has gone relatively unnoticed because of triple digit appreciation. This is not the case today. Home values have dropped. Real estate prices could remain stagnant for some time to come.

If you are taxed by a college because you have a large amount of home equity you would have a strong case to appeal using similar evidence as provided above and asking how they can justify it today.